RBI keeps repo rate unchanged, says Indian GDP could contract by 9.5%

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In the recently made announcement by the Reserve Bank of India, it was stated that the key policy rates would remain unchanged

But what does this mean? And how will this affect the economy? We shall analyze it here.

This declaration directly signals that the country standing in the way of the second wave of the covid-19 pandemic infections is literally poised to renew its tryst with the trajectory followed pre-covid.

With this step into place, inflation is expected to jump up to reach the target of 4% by the fourth quarter of the current financial year.

After the meeting of Reserve Bank of India’s monetary policy committee, Shaktikanta Das, RBI governor, said that the country witnessed a few encouraging and positive growth signs in the economy and that it expects economic activity to return back to growth in January to March quarter. He also said that the GDP for the full fiscal year is expected to contract by 9.5 %.

The monetary policy committee has taken a decision to take into consideration a more urgent need to revive growth at a time when the economy is likely to witness a three-speed recovery. While unveiling the bi-monthly monetary policy, RBI said that the deep contraction seen in the June quarter of the current financial year is behind us and good signs of growth are visible in the flattening of the curve of the covid-19 case across the country.

The monetary policy committee or MPC has been recently revamped and is headed by Shaktikanta Das. It is also expected that a faster and stronger rebound in the economy is quite feasible provided that the current momentum of upturn gained ground. The panel also declared that the real GDP would see a growth rate of 20.6 percent in the first quarter of 2021-22.

The Reserve Bank of India has taken a series of measures to ensure the required liquidity in the market as well as to control the yields at a time when the government and the business opportunists are thinking and devising strategies to tap the bond market in a big way for raising funds. These steps include Tap Targeted Long-Term Operations or TLTRO of rupees 1 lakh crore for the revival of specific sectors. Moreover, open market operations or OMOs for state development loans for the first time also fall under this scope.

The RBI has relaxed the risk weights to boost the flow of funds to the real estate and retail segments. Risk weights is the capital required to be set aside. The same has been done on individual home loans. Adding to that, the central bank has also increased the loan limit for small business and retail borrowers.

The central bank will now make available the real-time gross settlement or RTGS system active 24 hours a day and 7 days a week from December 2020. RTGS system is used for online transfer of funds above rupees 200,000. This step will make India a large-value payment ecosystem.

The panel has kept the repo rate at 4% and reverse repo rate at 3.35 %. The Repo rate is the rate at which the RBI lends to the banks whereas the reverse repo rate is the rate at which the commercial banks park its funds with the RBI. The bank has also decided to keep the stands at accommodative for the rest of the current financial year and possibly at the beginning of the next financial year as well. In the may review the rate was reduced by 40 basis points.

Currently, the Indian economy stepping into the face of extreme uncertainty in context with its fight against the covid-19 pandemic. The second wave of infections remains a major threat to the economic as well as the social condition of the country. Relative to prior covid levels several high-frequency indicators towards easing of contractions in a lot of sectors of the economy, backing it up with a growing trend now.

The projections by the central bank indicate a rise in inflation to the target by the fourth quarter of 2020-21. In a survey conducted by the bank in the month of September 2020, it was revealed that the households predict the inflation to reduce modestly in the coming 3 months, the reason being a green signal in the supply chain growth. For the second quarter of 2020-21 retail inflation is expected to be at 6.8% while the percentage for the first six months of 20 20-21 would be between 5.4 to 4.5. The expected inflation in the first quarter of 2021- 22 would be nearly 4.3 %.

However, the growth rate of the real GDP in the second quarter of the year 2020-21 is expected to be negative at 9.8 %. on the other positive outlook, an improvement of 0.5 % in the fourth quarter is expected. The third-quarter estimates are also negative at 5.6 %. For the year 2021-22, the real GDP growth rate is set at 20.6 percent

While taking this decision, the committee has chosen to give importance to the urgent need for economic revival and mitigation of the impact of the pandemic stating that the current inflation bump could be a transient one.

Dinesh Kumar Khara, the chairman of the State Bank of India, set that this decision taken by the RBI policy committee was a perfect example of doing “whatever it takes” to revive the economy. “The RBI will maintain the required liquidity conditions and will carry out the market operations in the form of outright and special open market operations,” said Das in a statement. The weighted average cost of borrowing by the central government presently stands at 5.8 % which is the lowest in the last 16 years.

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